A complex order (or a combination order) is a trade combining two or more instruments, such as a derivative or an underlying asset (e.g. stock) that are to be traded at the same time, in the same related quantity and at a price set as a certain ratio or a spread between such instruments—hence a combination order. The purpose of such trade is to pursue a certain specific strategy, such as risk mitigation, or a specific speculative trading strategy, and, therefore, such combination trade is valuable only in as much as it is executed at the same time and with a predetermined relationship between its component parts. A partially executed combination trade where one leg of a transaction is executed and the other one is not, will not serve the intended purpose, and, in fact can dramatically increase the risk of trader's overall trading strategy. An example of a complex order is the buying of one option and the selling of another option at the same time with respect to the same underlying instrument, such as IBM stock. Each component of a complex order is referred to as a “leg.” For convenience, a complex order may be quoted in the marketplace as a difference between the leg prices (the “spread”).
An exchange, such as International Securities Exchange (ISE) can execute a complex options trade natively (i.e., within the same exchange by executing both legs of the combination transaction simultaneously) (see FIG. 1). A drawback of this approach, however, is that the customer may receive sub-optimal pricing for the trade, or may not be able to execute one of the legs of the transaction if for some reason the trade becomes unmarketable. In such a situation, different trading venues can be used, with each of the legs executing separately (see FIG. 2). The U.S. has a multi-listed, distributed trading environment in which several exchanges may trade the same underlying instruments (e.g. IBM stock and derivative instruments with respect thereto) (see FIG. 3). In this trading environment, a trader who wants to achieve the best possible price may want to buy one option from a first exchange and sell the other option on another exchange, thus not trade on a native exchange but rather trade inter-market. Of course, although it offers arbitrage opportunities and a higher liquidity of a better price, the inter-market strategy is more risky because the likelihood that both legs of the transaction may not become executed simultaneously increases.
Conventionally, a multiple exchange type of trade can only be accomplished via separate trades at the various exchanges with respect to separate legs of the same combination transaction. One drawback of executing separate trades in order to implement a complex order is that the trader accepts a “legging risk.” More specifically, the trader accepts the risk that the market conditions may change before each and every leg of the complex order can be filled. For example, if only the first leg of a two-leg complex order can be filled (e.g., a call option), then the trader must accept the completion of the first leg without the accompanying second leg (e.g., the put option that was designed to limit trader's potential market risk) (see FIG. 2).
What is needed are techniques for creating a complex order and routing the complex order to one or more exchanges to achieve optimal pricing without exposing the customer to the conventional legging risks associated with the trading of complex orders. The trading system of the present disclosure provides this mechanism by smart routing the order to obtain the best possible price (see FIG. 4) and by accepting the ultimate risk of partially executed order where one leg is executed and the other is not (see FIG. 5).